The Internal Revenue Service has reopened the Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP) through November 22, 2024, allowing businesses to correct improper ERC payments.

The agency also plans to mail up to 30,000 recapture letters to businesses that improperly received ERC payments.

Background

The ERC is a legitimate, refundable tax credit designed to help businesses that continued to pay employees while they were shut down because of the COVID-19 pandemic or that experienced a significant decline in gross receipts in 2020 or 2021. While Congress designed the ERC with the laudable goal of helping businesses survive the pandemic while also encouraging them to keep employees on the payroll, ERC fraud has run rampant and unscrupulous promoters have pushed businesses that do not qualify for the credit to file improper claims. For almost two years, the IRS has engaged in a concerted effort to stamp out fraudulent ERC claims.

Voluntary Disclosure Program Reopens

On August 15, 2024, the IRS announced that it was reopening the ERC specific Voluntary Disclosure Program under slightly less favorable terms than the first ERC VDP program that ran from December 21, 2023 through March 22, 2024. Businesses that are accepted into the second, and final, ERC VDP will have to repay 85% of the ERC they received (instead of the 80% offered during the first ERC VDP). Applications for the second ERC VDP will be accepted until 11:59 pm on November 22, 2024.

“The limited reopening of the [VDP] provides an opportunity for those with improper claims to come in ahead of IRS compliance work and get a discount on repayments,” said IRS Commissioner Danny Werfel. He noted that many companies claimed improper credits because they were the target of aggressive marketing tactics.

“This provides a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS,” he said.

Eligibility Requirements

Any business that claimed the ERC for one or more quarters in 2021 and received a credit or refund before August 15, 2024 is eligible for the second ERC VDP, provided that:

1. The business is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation.
2. The IRS has not received information from a third party alerting the IRS of the business’ noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action.
3. The business is not under an employment tax audit by the IRS for any tax period(s) for which the business is applying for the second ERC VDP.
4. The business has not been notified by the IRS that the ERC it received is being recaptured for any period the business is applying for the second ERC VDP.
5. The business has not previously received notice and demand for repayment of all or part of the claimed ERC.

Businesses that claimed the ERC using a third-party payer (such as a PEO or CPEO) can participate in the second VDP, but the third-party payer must submit the VDP application.

The terms of the second ERC VDP are similar to the first ERC VDP including:

• Businesses are eligible if they received, but did not qualify for, any ERC during the quarter(s) they are applying to the VDP for (i.e., a business cannot use the VDP to correct a quarter where they were eligible for the ERC but received an excess amount).
• Businesses will not have to repay any overpayment interest received.
• No underpayment interest will apply if the business makes full payment of 85% of the claimed ERC prior to executing the closing agreement.
• Businesses are not required to reduce their wage expense on their income tax return. (Employers can file an amended income tax return to report their full wage expense if they already reduced their wage expense to account for the ERC.)

Additional Program Considerations

Applicants must provide the name, address and phone number of any preparers or advisors who assisted with their original ERC claim and a description of the services provided by the preparer or advisor. The IRS will not assert civil penalties if the business remits 85% of the claimed ERC prior to executing the closing agreement.

If an applicant is unable to remit full payment, the IRS may consider alternative payment arrangements such as an installment agreement, but interest and penalties will apply.

Lastly, execution of a closing agreement does not preclude the IRS from investigating any associated criminal conduct or recommending prosecution for violation of any criminal statute and does not provide immunity from prosecution. Businesses subject to potential criminal liability should utilize the IRS Criminal Investigation Voluntary Disclosure Practice.

IRS to Mail up to 30,000 Recapture Letters

The IRS also announced on August 15, 2024 that it is mailing up to 30,000 ERC recapture letters to businesses that improperly claimed credits in 2021 or on “later filed” 2020 claims. The letters notify the recipients that the IRS is reversing or recapturing their previous ERC and will reclaim the ERC through normal tax assessment and collection procedures. Businesses that receive this letter will be ineligible for the second ERC VDP for quarters covered by the letter.

Previously, the IRS notified more than 12,000 businesses that their 2020 ERC claims were excessive or erroneous, resulting in $572 million in assessments. The new batch of letters involve larger claims than earlier letters because businesses were potentially eligible for larger credits per employee in 2021 than in 2020. The latest “clawback” notices potentially represent more than $1 billion in ERC claims.

“This new round of letters serves as another incentive for businesses that believe they received an erroneous [ERC] payment to come forward and participate in the disclosure program and resolve the matter on more favorable terms” said Commissioner Werfel. “The disclosure program provides a limited, unique opportunity to avoid IRS compliance problems as well as sidestep a significant repayment fee with penalties and interest.”

The Takeaway

The second ERC VDP offers businesses a final and limited time opportunity to repay improperly claimed ERC at a discount while avoiding penalties and interest. Businesses who submitted an ERC claim should review their eligibility with a trusted tax professional before they are contacted by the IRS, especially if they hired a tax credit promoter to file their claim.  Additionally, businesses that receive a recapture letter should promptly consult legal counsel to discuss their options.

Fox Rothschild LLP has established an Employee Retention Tax Credit Task Force to advise businesses and tax advisors on all aspects of the ERC.

For more information, please contact Matthew D. Lee at mlee@foxrothschild.com, Matthew S. Adams at madams@foxrothschild.com, Brian C. Bernhardt at bbernhardt@foxrothschild.com, or Jonathan M. Wasser at jwasser@foxrothschild.com.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.